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2015 (11) TMI 438 - BOMBAY HIGH COURT

2015 (11) TMI 438 - BOMBAY HIGH COURT - TMI - Oppression - dilution of the equity of Jamal from 50% as originally proposed to 28.33% which it was brought down to as a result of divestment in favour of Nilesh and Doshi - whether act was illegal and constituted oppression? - ouster of Jamal from the management is claimed to be another act of oppression - Held that:- The first stage of reduction of Jamal’s agreed shareholding, i.e. allotment of 100 instead of 250 out of 500 shares of the Company in .....

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wn to 100 shares. The CLB observed that when there was no proof of any consideration paid for even 100 shares by Jamal, merely on the basis of errors and alterations in the register of members, no grievance could be made about reduction of Jamal’s shareholding from 250 to 100 allegedly by way of a manipulation. Besides, this aspect of the matter is hardly of any relevance, since, as rightly observed by the CLB, Rajan has neither taken any advantage of denying those 150 shares to Jamal nor any ex .....

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olding to be allotted to him was to get the House of Tata’s on board for development of Phase2 and 3. Tatas did after all enter into an agreement with the Company after Nilesh’s induction. The CLB noted that Tata’s association at that stage had greatly benefited the Company inasmuch as the Company could raise a loan from ICICI Bank for making the balance payment of ₹ 44.4 crores to Parke Davis. Tata’s also took space in the existing building (Phase 1) for their sister concern, Sitel. The T .....

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ilesh. The CLB also found that at the relevant time, i.e., when Nilesh resigned from the Board in 2001, or when the board of the Company noted in its meeting of 18 September 2003, which was attended by Jamal, that Tata’s had expressed their intention to exit from the project, or even when Tata’s actually left in 2004, Jamal did not raise any issue about Nilesh. In the premises, the CLB did not find anything wrong about 28.33% shareholding meant for Nilesh. This part of the impugned order is clea .....

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Jamal’s own admission contemporaneously made before the disputes arose between the parties, when, on 4 March 2005, in the wake Doshi’s proposed exit from the Company, he (Jamal) categorically asserted that he had no complaint against Doshi, who, Jamal himself agreed, had played his role and assisted the project. Jamal even suggested that the parties should convince Doshi to stay on till the conclusion of the project. In the face of all this material, if the CLB concludes that Jamal was not just .....

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rred or even conveyed through Counsel during arguments that had he been aware that the shares meant for Nilesh and Doshi were to go to Rajan, he (Jamal) would have undertaken the obligations under which the shares were to be allotted. Secondly, there is nothing on record to show that Jamal had any objection to the allotments per se to Nilesh and Doshi. If that is so, the complaint, if any, as noted by the CLB, could only be made by Nilesh and Doshi, according to whom their respective obligations .....

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re was no oppression of Jammal on account of reduction of his shareholding from 50%, as originally proposed, to 28.33%, as finally brought down to, is clearly sustainable and does not give rise to any question of law.

Mismanagement - Jamal in regard to the transaction with Ashwamegh, where 18000 sq. ft. of constructed area was sold - Held that:- The CLB, was, however, of the view that interest ought to have been recovered from Ashwamegh for delayed payment of consideration, but did no .....

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tions that the property was not sold at an undervalue, that there was nothing to suggest either than Rajan and Ashwamegh were related parties or that the decision was against the interest of the Company or enriched Rajan, the CLB refused to order cancellation of the transaction. Besides, the CLB held that Ashwamegh was not a party to the petition and in its absence the agreement could not have been cancelled, in terms of Section 402(e) of the Act.

For the same reasons, as in the case .....

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the Company by Rajan to the extent of the amount of interest. In Stylus, the CLB found that the decisions were duly taken in board meetings of the Company, which were not objected to by Jamal. Though the CLB found some substance in Jamal's contentions regarding lack of full transparency in the Stylus matter, since the draft agreement was not placed before the board, it observed that merely for that reason, the agreement could not be cancelled unless it was found to be against the interests of t .....

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y was in need of short term funds, the promoters would bring in money and then when funds are available with the company later, would take the same out; that what was to be examined was whether funds were provided when the Company was in need of them; that it was an admitted position that the project had progressed well, the Company had earned profit of over ₹ 14 crores as on 31.3.2007 and Rajan could manage to save about ₹ 11 crores payable towards penal interest. The CLB found that .....

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Jamal's case of mismanagement can be described as perverse. They are all supported by evidence on record; no irrelevant material is considered to arrive at the same; and they are all possible conclusions. No question of law arises therefrom for the consideration of this Court under Section 10F.

Validity of the relief granted by the CLB - after acknowledging 28.33% share of the Appellants in the first Respondent Company (if not 50% as claimed by Jamal), the consideration for the Appel .....

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ssion and mismanagement including about alleged attempts on the part of the company to sell the land at an undervalue. In these facts, the land was directed to be sold under orders of the CLB and proceeds distributed between shareholders. These facts were clearly distinguishable from the facts of our case. The CLB found that the Company, here, was actively engaged in the business for which it was established, was making profits after being brought up single handedly by Rajan to the present level .....

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009 With Company Application No.104 of 2010 In Company Appeal No.19 of 2009 In Company Petition No.106 of 2009 With Company Application No.18 of 2010 In Company Appeal No.19 of 2009 With Company Application No.45 of 2010 In Company Appeal No.19 of 2009 With Company Application No.7 of 2015 In Company Application (L) No.50 of 2015 In Company Appeal No.19 of 2009 With Company Appeal No.21 of 2009 In Clb Company Petition No.106 of 2005 With Company Application (L) No.3 of 2014 In Company Appeal No. .....

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Advocate, a/w. Mr. M.S. Doctor, Senior Advocate, Ms. Ankita Singhania, i/b. Bachubhai Munim & Co. JUDGEMENT :. Company Appeal No.19 of 2009 impugns an order passed by the Company Law Board, Principal Bench ( CLB ), in the Appellants petition under Sections 397 and 398 of the Companies Act, 1956 ( Act ). The facts of the Appellants case may be briefly stated thus: 2. Appellant No.1 - Akkadian Housing and Infrastructure Pvt. Ltd. ( Akkadian ) - is a private company limited by shares incorpora .....

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ismanagement are made in the original petition and which form the subject matter of the present appeal. Respondent No.2 - Shobhit Rajan ( Rajan ), who is the Managing Director of the Company, is alleged to be holding the balance 71.67% of shareholding of the Company through himself and his friends and /or relatives and/or entities controlled by him, who are also arraigned as Respondents to the original petition. 3. Sometime in early 1999, Jamal claims to have come to know of a prime property adm .....

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the Company herein, was acquired for the purpose and a shareholders agreement dated 23 December 1999 was entered into between Jamal and Rajan to operate, manage and control the Company. Jamal and Rajan were each to subscribe for and acquire 50 per cent of the issued and paid up shares of the Company. The Company s board of directors was to comprise of six directors of whom three were to be appointed each by the groups representing Rajan and Jamal subject, however, to equal capital contribution b .....

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roject, Rajan and Jamal agreed to take Respondent No.3 - Nilesh Parekh ( Nilesh ) - on board, by diluting their respective equities of 16.67% each in favour of Nilesh. Nilesh, in turn, would ensure that the house of Tata s, through their property development arm - Tata Housing and Development Company Limited, would provide the requisite capital and technical expertise to develop the subject property. A Supplementary Agreement dated 15 June 2000 was accordingly entered into between Rajan, Jamal a .....

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ct contained in the Shareholders Agreement between Jamal and Rajan. 5. The development project over the subject property, as conceived by the parties, involved three phases - Phase 1 involving completion of rentable area of approx. 2,00,000 sq. ft. of the original factory premises of Parke Davis ( Plot A ), Phase 2 involving construction of a tower ( Plot B ) and Phase 3 involving balance development ( Plot C ). 6. At this stage, in or about March 2001, Respondent No.4 - Bharat Doshi ( Doshi ) - .....

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3% each as before. 7. In or about March 2001, the acquisition of the subject property was accomplished by the Company. A total consideration of ₹ 49 crores was paid to Parke Davis for the acquisition. A major part of this consideration came from funds arranged through banks and financial institutions in addition to the initial contribution of Rajan and Jamal of ₹ 2.45 crores each. 8. The Company also proceeded to develop the first two phases (Plots A and B) in the name of Logitech Pa .....

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petition under Sections 397 and 398 of the Act, complaining of acts of oppression and mismanagement in the affairs of the Company on the part of Rajan and others. 10. By an interim order dated 27 December 2005, the CLB directed that Jamal should be invited to all board meetings and allowed to take part in the deliberations; that status quo in respect of the composition of the board as of date with Jamal as an invitee should be maintained; and that all proposals for sale/lease of the Company s pr .....

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ced the shareholding of Jamal from 50% to 28.33%, whilst Rajan himself continued to control, through Nilesh, Doshi and others, 71.67% shares in the Company, which was against the original understanding of 50% stake in the equity each of Rajan and Jamal; (c) Jamal was unauthorisedly removed from the board of directors of the Company as an act of oppression, by manipulation of the Company s records and with a view to completely oust him from the affairs of the Company; (d) Rajan, being in control .....

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that if at all one of the two, Rajan and Jamal, had to be considered as the prime mover of the project, it could only be Rajan and not Jamal. The CLB did not find fault with the reduction of Jamal s shareholding from 50% to 28.33% (i.e. by divestment in favour of Nilesh and Doshi), though it observed that Rajan should have kept Jamal informed about the former controlling the shares meant for Nilesh and Doshi. The CLB, however, found the act of removal of Jamal as a director oppressive and declar .....

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in the transactions concerning Ashwamegh, Fine Plaza and Stylus. Whilst CLB found no substance in the allegations of siphoning of funds, it found fault with noncharging of interest on loans given to related parties. The CLB also did not find any substance with the payment of remuneration and perquisites to Rajan by the Company. The CLB found that Rajan had a justifiable grievance that Jamal failed in his obligations/commitments to bring in funds. Whilst considering reliefs to be granted on these .....

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nce, in the present case, it was Rajan, who had been managing the affairs of the Company, whilst Jamal had not been in participation, it was Jamal who had to exit. Secondly, it held that on the question of valuation of his share, Jamal was only entitled to share profits arising out of the valuation of the land. The CLB then had to determine the date of valuation and the proportionate share of Jamal. The CLB was of the view that the date of valuation should be the date of the filing of the petiti .....

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at from the value so determined, the total cost of the land taken at ₹ 56.56 crores (i.e. basic price + interest + stamp duty and registration charges) should be deducted to arrive at the profit and of this profit, Jamal should get 6.6% subject to a minimum of ₹ 30 crores. The petition was disposed of in these terms, reserving the jurisdiction to determine the value of the land. 13. This order is challenged in the present appeal on several grounds. The grounds formulated by Ms. Sethn .....

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ement of the affairs of the Company. (iii) On findings of oppression and mismanagement, Jamal should have been restored as a 50% shareholder of the Company, reinstated in the management and various equitable reliefs should have been granted under Section 402 of the Act with a view to do substantial justice; (iv) The Company was in effect a quasi partnership between Rajan and Jamal and principles applicable to dissolution of partnership ought to have been applied to, and legitimate expectations o .....

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he alternative, bifurcated the property; (vii) The CLB erred in valuing the property as at the date of the petition instead of valuing it as at the date of the judgment; (viii) Jamal did not get a fair market value of his share in the Company, but instead got a discounted value, which was impermissible. 14. The appeal basically involves three aspects. The first is the case of oppression made out by the Appellants. This involves the dilution of the equity of Jamal from 50% as originally proposed .....

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Rajan as alleged by the Appellants. We will examine whether the CLB has made any errors of law in drawing its conclusions on these two aspects. The third and the last aspect is the relief granted by the CLB. We will examine if there is any error of law in granting the relief. 15. On the case of oppression : 15.1 The case of the Appellants is that the original Shareholders Agreement between Rajan and Jamal stipulated 50:50 shareholding ratio between the two, but in breach of that agreement, by fa .....

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brought down to 33.33%. It was reduced further to 28.33% at the time of induction of Doshi. At each of these stages, Jamal was made a misrepresentation; Jamal was never informed that it was Rajan who actually controlled the shareholding divested in favour of Nilesh and Doshi; and Rajan s act of thus gaining control over 71.67% shareholding of the Company was a malafide act. Secondly, it is submitted that Jamal was illegally ousted from the management of the Company by removing him from the dire .....

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ount required for stamp duty and transfer costs. The relevant provision (part of Clause 5) is quoted below: In the event of either Group not providing partly or fully the amount required for completing the sale and same is provided by the other Group then the share of the Group which is not funding will be reduced in proportion to the amount not provided i.e. the profits will be shared by the parties hereto in the proportion in which they have contributed the capital. If the capital contributed .....

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t of which is quoted above, was substituted by the following clause : The balance consideration of thee purchase price and stamp duty and registration fees (if required ) to be paid by the Company to ParkeDavis India Limited at the time of completion of sale shall be provided by each Group in equal shares. Simultaneously with the Supplementary Agreement, Minutes of Meeting were signed by Rajan, Jamal and Nilesh, which provided as follows : It was agreed between the parties that from the sale pro .....

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ree shares as per agreement dated 23rd December 1999 between Mr. Alnoor Jamal and Mr. Shobhit Rajan and Supplementary Agreement dated 15th June 2000 between Mr. Alnoor Jamal, Mr. Shobhit Rajan and Mr. Nilesh Parekh will come into effect. 15.3 In the backdrop of these provisions, the CLB rejected Jamal s case of oppression on account of reduced shareholding on the following basis : (a) In the present case, Jamal actively participated in the allotment of shares to the Respondent Companies and acce .....

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with others, had abandoned the rights and obligations arising out of the agreement. (d) Jamal had not produced any supporting document to establish that he had acquired the initial 250 shares, or even 100 shares for that matter, by paying any consideration. (e) In any event, by registering 100 shares in favour of Jamal, Rajan had not secured himself any extra benefit, as no dividend or other benefit on the shares had been denied to Jamal except that on this ground Rajan had claimed that Jamal w .....

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complain about Rajan controlling the shares meant for Nilesh and Doshi, it would only be Nilesh, who had a written agreement for allotment of 28.33%, and Doshi, who had an oral agreement for 15%, since according to both they had complied with their respective obligations against their entitlement for allotment of shares. (h) Lastly, the percentage of shareholding was of no relevance from the standpoint of the final order that the CLB had proposed to make. 15.4 None of these conclusions, which f .....

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through whom he held the Company s shares), even in other Folios there were corrections and alterations. Secondly, there were no supporting documents to show that Jamal had originally acquired 250 shares of the Company, but that by manipulation of records his shareholding was brought down to 100 shares. The CLB observed that when there was no proof of any consideration paid for even 100 shares by Jamal, merely on the basis of errors and alterations in the register of members, no grievance could .....

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The second stage of reduction of Jamal s shareholding, i.e. when Nilesh was inducted, is also adequately explained. As observed by the CLB, Jamal was a party to this arrangement. He actually signed a Supplementary Agreement for the purpose. Nilesh s commitment as against 28.33% shareholding to be allotted to him was to get the House of Tata s on board for development of Phase2 and 3. Tatas did after all enter into an agreement with the Company after Nilesh s induction. The CLB noted that Tata s .....

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ft the project later, it cannot be said that Nilesh s induction was vitiated for any reason or that it was not bona fide or for a genuine purpose. No fault can be found per se with 28.33% shareholding offered to Nilesh in a duly signed Supplementary Agreement between Rajan, Jamal and Nilesh. The CLB also found that at the relevant time, i.e., when Nilesh resigned from the Board in 2001, or when the board of the Company noted in its meeting of 18 September 2003, which was attended by Jamal, that .....

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with Doshi unlike in the case of Nilesh. It is common ground, however, that Doshi was brought in so that he could get upto ₹ 15 crores for the project. The allegation is that Doshi purportedly brought in only ₹ 2.72 crores as against the promised ₹ 15 crores and even from this amount, a substantial part was taken away by Doshi, leaving only ₹ 82,100 to his credit. Ms. Sethna even commented about the figure of ₹ 2.72 crores and suggested that there was no proof even .....

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of conveyance of the property, the requisite funds were brought in/arranged by Doshi and Rajan. Out of these funds, a sum of ₹ 2.72 crores was brought in by Doshi himself. There is certainly material on record to suggest that Doshi played a meaningful role, justifying his induction into the Company. That itself should be sufficient to sustain the CLB's conclusion in this behalf. But what is more important is Jamal s own admission contemporaneously made before the disputes arose betwee .....

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s arose, surely it is a plausible conclusion and does not give rise to any question of law. 15.7 That leaves only one question to be decided about the reduction of Jamal s shareholding through induction of Nilesh and Doshi, namely, the linkage between Rajan and the entities to whom shares meant for Nilesh and Doshi were allotted. The CLB noted in this behalf two important points. First, according to Jamal, he agreed to reduce his shareholding from 50% to 28.33% only on the consideration that he .....

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had any objection to the allotments per se to Nilesh and Doshi. If that is so, the complaint, if any, as noted by the CLB, could only be made by Nilesh and Doshi, according to whom their respective obligations were complied with, if shares were not allotted to them despite such compliance. And finally, the percentage of shareholding, in the ultimate analysis, hardly had any bearing on the order that the CLB actually made. (This aspect will be dealt with later in this order.) There is, thus, no m .....

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ctions under Section 402 of the Act ought to have been granted in that case, which aspect is considered later in this order. 15.9 The law cited by Ms. Sethna in connection with oppression within the meaning of Section 397 of the Act and also, concerning the reliance upon shareholders' agreement in relation thereto, does not fall for consideration, since I have upheld the conclusions of the CLB on the ground that they are supported by material on record and not vitiated by consideration of an .....

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ing of constructed areas of the project purportedly below the market rates, (ii) rotating and laundering of the funds purportedly prejudicially to the interests of the Company and (iii) benefits purportedly extended to related parties at the expense of the Company. 16.2 The allegation of the Appellants before the CLB was that Rajan sold and leased substantial portions of constructed space without due publicity and at an undervalue only with a view to enrich himself by underhand dealings. There w .....

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ucted area was sold, was that : (a) Jamal was not consulted; (b) the sale price of ₹ 4.5 crores was much below the market price, stated to be ₹ 10 crores; (c) the sale price was not received as per the stipulated time line; (d) when Ashwamegh failed to pay the full consideration within the stipulated period, the agreement of Ashwamegh ought to have been cancelled and its deposit forfeited; (e) the promoters of Ashwamegh were parties related to Rajan; and (f) even before receipt of fu .....

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d submitted a comparative statement of sales obtained from M/s. Jones Lang, from which it appeared that if at all there was a short sale, it could at best be of the order of ₹ 21 lacs; (iii) there was no document on record reflecting any transaction between Ashwamegh and Lucent and in the absence of such document, it was difficult to determine whether Ashwamegh had obtained any undue benefit from the alleged transaction with Lucent; (iv) Even though as per agreement Rajan had to consult Ja .....

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amegh was not a related party). The CLB, was, however, of the view that interest ought to have been recovered from Ashwamegh for delayed payment of consideration, but did not accept the Appellants' case that the agreement with Ashwamegh should have been cancelled. The basis of upholding the transaction notwithstanding acceptance of the case of delayed payment of consideration was that the Board being a court of equity, could not ignore business realities and inquire into the correctness or o .....

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t a party to the petition and in its absence the agreement could not have been cancelled, in terms of Section 402(e) of the Act. 16.4 These are all cogent reasons. There is material on record to sustain these and no irrelevant or nongermane material is taken into consideration to arrive at these. It is trite law that this Court, whilst exercising its jurisdiction under Section 10F, does not examine conclusions of fact as an ordinary court of appeal would in a civil appeal. Only if this court fin .....

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legal position contended by the Appellants, but find that in the present case, the impugned order does not fall foul of those legal principles. 16.6 The cases of Fine Plaza, Ecstacy and Stylus also follow the same pattern and the conclusions of the CLB concerning them can be sustained as possible conclusions of fact, which are neither unsupported by materials on record nor based on irrelevant or nongermane materials. In the case of these three transactions, in the first place, it needs to be no .....

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oncerning Fine Plaza, Ecstacy or Stylus. The allegations concerning these form part of interim applications of the Appellants before the CLB in the original petition. The original petition is not amended to include these. Be that as it may, the CLB has nevertheless proceeded to consider these allegations and found no merit in the same. In Fine Plaza, the CLB found that the Appellants did not establish that it was a related party of Rajan. The CLB also found the consideration of ₹ 22.51 cro .....

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Ecstacy, though the CLB found that the payment of ₹ 28.11 crores paid to Ecstacy was, in the absence of any particulars forthcoming, a diversion of funds, it noted that this amount had come back. What the CLB found amiss was the fact that it came back sans any interest. It accordingly ordered recovery of interest from the party and in default, restitution of the Company by Rajan to the extent of the amount of interest. In Stylus, the CLB found that the decisions were duly taken in board m .....

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be commensurate with the market rates. None of these conclusions can be faulted. No question of law can be said to arise in connection with these conclusions. 16.7 On the allegations of rotation of funds, the CLB held that it could not examine day to day transactions; that in a private company engaged in construction work, it was not uncommon that when the company was in need of short term funds, the promoters would bring in money and then when funds are available with the company later, would t .....

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. The CLB found no siphoning of funds, but merely found fault with noncharging of interest to certain parties such as Ecstacy, Millennium and Parshaw and ordered recovery of interest. 16.8 As for the remuneration paid to Rajan, the CLB did not find the same to be excessive or unreasonable. 16.9 None of the conclusions of the CLB noted above concerning Jamal's case of mismanagement can be described as perverse. They are all supported by evidence on record; no irrelevant material is considered .....

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are of the Appellants in the first Respondent Company (if not 50% as claimed by Jamal), the consideration for the Appellants' exit from the Company is not the market value of 28.33% share, but 4.35% of the profits arising out of the value of the land, which, with addition of 50% to take care of the pendency of the petition for nearly three years, works out to 6.6%. On a closer scrutiny, however, it not only appears to be a legitimate relief, and therefore, not giving rise to any question of .....

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erms. The parties before me have differing perceptions on the nature of this relief. Ms. Sethna for the Appellants claims that at least some instances of oppression and mismanagement are found in favour of her clients and therefore, equitable reliefs under Section 402 should have been granted; and that ultimately, if at all someone had to exit, it should have been Rajan as the oppressor rather than Jamal as the oppressed. Mr. Chinoy for the Respondent Rajan, on the other hand, submits that the r .....

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d late from, certain parties. But none of these findings can sustain an order asking Rajan to exit from the Company and directing Jamal to be put in sole management thereof. An unauthorized removal from directorship would entail at the most a reinstatement on the board of directors and noncharging of interest, a restitution of the Company by Rajan to the extent of such interest. Besides, it is important to note that as much as the solitary acts found against Rajan, which are referred to above, t .....

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t seriously contested by anyone. In fact, both Appellants and Respondents accepted that the solution had to be parting of ways. The question, if at all, was only who exits and at what price. In the premises, the order providing for parting of ways can only be described as a 'no fault' relief, which the CLB may well grant in a petition like this. 17.4 In Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd. (1981) 3 Supreme Court Cases 333 , the Supreme Court hel .....

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d which factor, to some extent, had gone in their favour on the question of oppression. Having had the benefit of that stance, they must, the court held, now make it good. The court hastened to add as follows : We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended primarily to set right the course of justice, insofar as we may. Later in the case .....

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nciple and to do substantial justice and found to be in order, the controversy really boils down to the manner ordered by the CLB to achieve it. As noted above, there are two fundamental issues : One, who should go out should it be Rajan or Jamal and two, what should be the consideration for such exit. 17.6 On the first issue, the CLB held that it would have to be Jamal rather than Rajan to exit the Company. It was submitted before the CLB on behalf of Jamal that Rajan should go out and Jamal sh .....

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considered as the prime mover, it could only be Rajan and definitely not Jamal. The reasons considered by the CLB for this conclusion were these : (a) From the documents produced by Jamal, it was beyond doubt that he was not only in negotiation with M/s. Warner Lambert but had agreed for a consideration of ₹ 49 crores for the property and entered into a draft MOU fixing the earnest money at 10% of the price; Similarly, from the document produced by Rajan, it was abundantly clear that even .....

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xpected Rajan to organize the balance payment to Parke Davis and had played no role in ensuring the balance payment to Parke Davis; (e) But for the efforts of Rajan, the Company would not have been in possession of the property and as a matter of fact even the earnest money of ₹ 4.9 crores would have been forfeited by Parke Davis; Rajan not only gave his personal guarantee but also his properties at Khar and Lonavla as collateral security for raising the loan from ICICI for payment to Park .....

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of irrelevant material. Apart from the question of prime mover, the CLB also considered the position that the Board had always taken the view that persons in active management, whether in minority or majority, should have the right to take over the Company. The CLB considered the decisions in Praful M. Patel vs. Wonderweld Private Limited (2002) 36 SCL 825 CLB-ND , C.M. Jain vs. CRM Digital Synergies Pvt. Ltd. 2008 142 Comp Cas 658 CLB and in Re: Nikhil Rubbers Pvt. Ltd. (2008) 215 CTR All 332 i .....

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ther than Rajan. 17.7 That brings us to the question of legality and validity of the consideration ordered to be paid to Jamal by the CLB against his exit. This, in turn, involves two aspects, namely, the method applied by the CLB for working out the compensation and the actual quantum of the compensation worked out. In other words, we have to examine the principle of valuation used by the CLB and the actual working out of the value of Jamal's share on such principle. 17.8 The principle of v .....

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e development of the property, but his share should be restricted to profits arising out of the land. 17.9 Several grounds have been urged before me to challenge this valuation of the Appellants' share. It is submitted that the first Respondent being a real estate company, the best way to part would have been to bifurcate the immovable property. That was indeed one of the suggestions made by Counsel for Jamal before the CLB. The suggestion was that the entire project should be partitioned in .....

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natives suggested by Counsel for Jamal or making valuation the way it did in the impugned order. 17.10 The alternative that Jamal should get the Company has already been discussed above and on that the CLB's conclusion has been found to be in order. Let me now take up the alternative of sale of the project and division of proceeds. The CLB rejected this alternative, holding that such an order would actually amount to winding up of the Company, whereas proceeding under Sections 397 and 398 we .....

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object of the company. SEBI, however, declined to give permission to set up the stock exchange. The proposal to construct one was, accordingly, given up by the company and for over ten years, the company did not conduct any business except deriving some rental income from the land. There were various allegations of oppression and mismanagement including about alleged attempts on the part of the company to sell the land at an undervalue. In these facts, the land was directed to be sold under ord .....

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le. No error of law can possibly arise. 17.11 The next suggestion was for partitioning the project in equal or determined shares. Equality of sharing has been dealt with above and ruled out. But it is submitted that this could have been done in any ratio which the CLB might have deemed proper. Before the CLB several judgments were cited in support of such division. These were the cases of Bhola Nath Paper House Limited 1983 53 CompCas 883 Cal , Trackparts of India Limited 2002 CompCas 350, Jaidk .....

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elied upon by the Appellants do show that it may well be permissible to divide the business and assets of a company between two groups of shareholders as part of relief under Section 402 of the Act. But that is essentially a matter to be governed by individual facts of each particular case. In Bhola Nath Paper House Limited (supra), a family company, each of the two groups held 50% shares and each had a managing director on the board; the business had been effectively bifurcated and each group w .....

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each had a managing director/joint managing director, there were three divisions, one under the management of one group and two under the other. What the Board did was to finalise this division after an exercise of valuation. In Jaidka Motor Company Limited (supra), an original partnership of two groups of family converted into a company with the two having equal shareholding and representation on the board, the company had two business units, one at Patna and the other at Kolkata managed by eac .....

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amily members, thus redistributing the investment in the subsidiary and not strictly dividing the business or assets. 17.13 An analysis of these cases would show that the companies in these cases essentially were family companies with equal shareholdings and what is important, were in joint management with each group individually managing a part of the business or a separate undertaking. The Courts ordered division of business and assets on the same lines as was broadly the case whilst the compa .....

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oups in a ratio to be determined by the CLB, thus, cannot be termed as an impossible or perverse view. The CLB clearly had the discretion to mould an appropriate relief whilst ordering parting of ways between the two groups and its conclusion that division of the assets/land between the parties ought not to be ordered, in the present case, cannot be termed as an unsound exercise of such discretion or actuated by a nongermane consideration. 17.15 That leaves us with the last of the options sugges .....

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Agreement and Minutes of Meeting of 15 June 2000. It came to a conclusion that Clause 5 operated only upto the stage of acquisition of the land and not to the implementation stage of the project. Secondly, the CLB considered that even assuming the agreement to be applicable to the development stage, profit sharing was to be in proportion to the respective contribution of the groups, which included all types of funding provided by the groups, whether by way of share subscription or loans brought .....

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l guarantees cannot be excluded for determining the profit sharing ratio, though interest paid by the Company to the banks on these loans may have to be deducted from the loans. Thirdly, the CLB considered whether the valuation must be for the entire project. In this behalf, the CLB considered the totality of the agreements, namely, the JVA (already considered above), the supplementary Agreement and the Minutes, and held that they did not talk of development, but dealt only with acquisition of t .....

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e arriving at the actual cash compensation payable to Jamal. One was the date of valuation of the land and the other was the proportion of the share of Jamal in such valuation. What was suggested by Rajan's Counsel was that other than making an initial investment of ₹ 2.45 crores, Jamal had done nothing - he neither brought in any funds nor did he participate in the affairs of the Company - and therefore, he should be treated merely as an investor or like a sleeping partner and be paid .....

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tion arrived at. 17.17 The CLB was conscious that in all cases of valuation concerning a company, the proportion is usually based on the shareholding ratio. But there was a cogent reason in the present case, according to the CLB, to depart from this principle. In the present case, the parties had themselves agreed to sharing of profits in the ratio of funding brought in by them respectively and even otherwise, on an equitable principle, in the peculiar facts of the case, the shareholding could n .....

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ve). Thus, Jamal's contribution of funds to meet the cost of land was 4.35%. That was treated by the CLB as the proportion of the profits arising out of the land value to which Jamal was fairly and equitably entitled. 17.18 On the date of valuation, the parties propounded diverse approaches before the CLB, each relying on judgments in support. Counsel for Jamal rooted for the date of the order as the most appropriate date of valuation. This was on the ground that the price of the land had go .....

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e determined on the date of the order. Learned Counsel for Rajan, on the other hand, submitted that the CLB had been consistently following the principle of fixing the date of valuation as the date on which the petition was filed and there was no reason, in the facts of the present case, to deviate from this practice. Learned Counsel, in support, relied on the case of Scottish Cooperative Wholesale Society Ltd. (1958) 3 ALLER and Nikhil Rubber (2008) 215 CTR All 332. 17.19 The CLB held that ther .....

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(namely, Rajan) without any assistance from Jamal beyond contributing for the initial earnest money, there was no persuasive ground to deviate from the ordinary practice of going by the date of the petition. The CLB also observed that the real estate market was fluctuating and there was no definiteness as to whether the land value had gone up or down during the pendency of the petition, and that, besides, fixing the date of the order as to date of valuation would amount to leaving the matter to .....

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ighest price prevailing during the last quarter of 2005 was reckoned as the appropriate price to determine the value of the land. It called upon the parties to obtain market rates as of the last quarter of 2005 from reputed real estate agents to enable it to determine the value and arrive at the profit after deducting the total cost of the land without taking into account the interest paid to banks towards the loan for the acquisition of the land. Then from the profits so arrived at, 6.6% would .....

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without adding interest paid to banks to the cost) or ₹ 30 crores, whichever was higher. That, said the CLB, was a just and fair return on his investment of ₹ 2.46 crores, which remained in the Company for about 8 years. 17.22 The question now in the appeal, that is left to be answered, is: Is there any error of law in this determination? We shall presently answer it. But before we do so, it would be apposite to note the limits of our inquiry. In V.S. Krishnan Vs. Westfort HiTech Hos .....

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t under Section 10F is restricted to the question as to whether on the facts as noticed by the Company Law Board and as placed before it, an inference could reasonably be arrived at that such conduct was against probity and good conduct or was mala fide or for a collateral purpose or was burdensome, harsh or wrongful. The only other basis on which the appellate court would interfere under Section 10F was if such conclusion was (a) against law or (b) arose from consideration of irrelevant materia .....

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F on the touchstone of these very principles. The Court will consider if the relief awarded is against the law or such that no reasonable person properly instructed in law could have arrived at or is determined on consideration of irrelevant material or omission to consider relevant material. 17.23 Let us now examine, in the light of these principles, whether the valuation exercise carried out by the CLB in the present case can be said to be vitiated and liable to be interfered with by this Cour .....

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tant to note that the Company was established to purchase and develop the Parke Davis property. Purchase of land and development of real estate envisage large funding and also extensive management of affairs. The CLB's conclusion that the parties themselves agreed to share profits on the basis of the ratio of funding brought in by the respective parties is reasonably based on the agreement between the parties, which is reflected in the JVA, Supplementary Agreement and Minutes of Meeting, ref .....

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ng towards the further purchase price of the land or its development and also did not participate in the management so far as the development was concerned; and that in fact it was a one man show of Rajan. Again a conclusion based on appreciation of facts and perfectly reasonable, supported by relevant material and uninfluenced by irrelevant material. The basis of valuation, considered by the CLB in its impugned order, thus, cannot be faulted on any question of law. 17.25 The proportionate share .....

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17.26 As far as the date of valuation is concerned, the CLB has a wide discretion in that behalf. It must do what is just and equitable in the peculiar facts and circumstances of the case. But other things being equal, the valuation ordinarily must be of the date of the petition. The following passage of Lord Denning, J. in Scotish Cooperative Wholesale Society s case is very much instructive. One of the most useful orders mentioned in the Section which will enable the Court to do justice to th .....

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the facts of the present case to depart from this principle. There is indeed none. In any event, the CLB not only fixed the date of valuation as the date of the petition, but considering the pendency of the petition for about three years, for the fault of none, fixed a 50% markup on the share of the profit determined as at the date of the petition. That was to compensate Jamal for the delay between the presentation of the petition and the order. There is nothing pointed out in the appeal or at .....

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arting of ways between the shareholders here, suggesting thereby that the valuation of shares should be on a pure prorata basis. On the other hand, it is the submission of the Respondents that the Company is a joint venture between businessmen who had come together for a particular project, namely, acquisition and development of a particular property and there are no incidents of quasipartnership - neither equality of shares nor joint participation in management. It is submitted that in the pres .....

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a small private company are acquired either by allotment on its incorporation or by transfer or devolution at some later date. There are two categories of such companies. In the first category it is a matter of common occurrence for a company to be incorporated in order to acquire an existing business or start a new one, and, in either event, for it to be a vehicle for the conduct of a business carried on by two or more shareholders which they could, had they wished, have carried on in partners .....

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ers. These elements, though not exhaustive, are generally regarded as the most important. The last of these three elements is usually a defining criterion of any private company, but in the case of a quasipartnership may take in special restrictions such as compulsory transfers to existing shareholders, preemption rights of other shareholders, etc. In the case of a quasipartnership of this type, the common course would be to fix the price for transfer of shares on a prorata basis according to th .....

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bought out on the same basis. Though there is no universal rule in the case of either of the two categories, these are general principles, which are, of course, subject to exceptions. For example, in a quasipartnership, as explained by the Court in Bird Precision, there may be the case of a minority shareholder whose interests had been unfairly prejudiced by the conduct of the majority, but who had nevertheless so acted as to deserve his exclusion from the company. In such a case, despite the co .....

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the Court further adding that the 'proper' price is the price which the Court in its discretion determines to be proper having regard to all the circumstances of the case. The Bird Precision principle was followed in Re D.R. Chemicals Ltd. (1989) 5 BCC 39 where the Court put the matter thus : approach the matter somewhat differently. Mr. Harries is a minority shareholder seeking a fair price or his shares. In the absence of any special features the value of his shares must reflect the fa .....

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ngly in my judgment the discounted basis of valuation is appropriate. In Re MeCarthy Surfacing Ltd.27, the Court was concerned with the case of shareholders, who, though originally were quasipartners, had subsequently lost their position as quasipartners. The Court held that it would not be an appropriate exercise of its discretion to direct that their shares should continue to be valued as if the quasipartnership existed. The Court held that this was a fortiori the case in view of the fact that .....

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t apply insofar as their association was concerned; the record of the case did not indicate that Rajan and Jamal were equal partners in the sense of being 50% partners each; that it was an admitted fact that Jamal never involved himself actively with the management of the company. On these facts, the CLB held that it would be difficult to apply the quasipartnership principles. The conclusion, which is essentially one of fact (or, at any rate, a mixed question of law and fact), is a reasonable co .....

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r who could claim a prorata valuation. 17.31 Once, as a matter of principle, valuation of Jamal's share at a discount is accepted, the actual valuation, or in other words, calculating of the discount, is really a question of fact, the sole basis of which is the consideration of what is fair in the facts of the particular case. As we have noticed above, the CLB has arrived at a fair basis and proportion in the particular facts of the case for valuing Jamal's share. It cannot be faulted on .....

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nt estimates. What the Court in a 10F appeal has to see is whether the conclusion is perverse and not possible to sustain on the basis of material on record. The CLB has acted reasonably in the matter. It has taken into account all relevant aspects. There are seven 28 366 Butterworths Company Law Cases (2000) 1 BCLC germane aspects in this behalf as outlined by Mr. Chinoy. Firstly, the relief is not being granted on a finding of oppression or mismanagement, but on a 'no fault' principle .....

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o be as of the date of the petition. And lastly, as a result of the delay in the hearing of the petition, which was not due to the fault of any of the parties, a 50 per cent markup on the original valuation as of the date of the petition was ordered. These are all relevant considerations, on the basis of which the CLB has ordered valuation of Jamal's share and claimed the same to be just and equitable. This Court cannot find fault with this conclusion on any question of law, particularly hav .....

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